Dish Network Corp won Blockbuster Inc in a bankruptcy auction for $320 million, further broadening its business beyond satellite TV and setting up a possible showdown with Netflix.

Dish, the second-largest U.S. satellite TV company after DirecTV, trumped at least three other bidders, including activist investor Carl Icahn, for the one-time leader in video rentals.

Dish said the deal, which includes more than 1,700 Blockbuster stores, gives it new ways to market its services.

The deal covers substantially all of the rental chain's business, and likely gives Dish the rights Blockbuster had to stream movies over the Internet, the Blockbuster brand name and customer lists.

Dish declined to comment beyond its news release.

This is very clever, said Todd Mitchell, an analyst with Kaufman Brothers. Dish can transition Blockbuster from a retail to a streaming model so you have basically a Netflix-like offering.

The deal follows two others led by Dish Chairman and CEO Charlie Ergen this year that could transform Dish into a major provider of on-demand video through its satellite system and eventually over a wireless network for handheld devices, according to analysts.

Last month, Dish bought satellite and land-based communications company DBSD North America for about $1.4 billion, which expanded the amount of broadband spectrum the company has.

In February, digital set-top box maker EchoStar Corp, where Ergen is also chairman, agreed to buy Hughes Communications, which Mitchell said could one day provide technology to create a wireless network.

Dish expects to pay about $228 million in cash to acquire Blockbuster's assets, which as of February 27 included more than $100 million of receivables and cash and a rental library estimated to be worth $175 million.

The money will go toward paying off the company's creditors, which include Icahn and other bondholders as well as movie studios. The creditors are owed more than a $1 billion.

David Berliner, a turnaround advisor for BDO Consulting said the deal reminded him of Cablevision's purchase of The Wiz electronics stores as a way to sell it cable TV subscriptions.

Blockbuster has a similar agreement with Comcast Corp to install kiosks in its stores to sign up customers for the cable company's television service, which competes with Dish.

Berliner said new management with a background in satellite technology could breath new life into the Blockbuster business.

Maybe they can do an even better job with Blockbuster online in terms of deals with streaming video, said Berliner.

Blockbuster said when it filed for bankruptcy in September it had about 1.3 million subscribers for monthly or annual subscription services. Netflix Inc has more than 20 million for its mail-order delivery of movies.

While Dish will likely absorb some initial losses from the stores, Berliner said the deal has upside.

They have to continue to move gradually out of bricks and mortar stores and get more into online and take advantage of that opportunity, Berliner said.

Blockbuster had a market cap of more than $5 billion at its peak in 2002, but came under pressure from mail-order and digital competitors.

Blockbuster filed for bankruptcy with a proposal to exit bankruptcy under the control of a group of investors that included Icahn and several hedge funds.

However, those investors never agreed on a business plan and withdrew their backing after poor holiday sales, and Blockbuster was put on the auction block.

Icahn has long been an investor in Blockbuster, and resigned from the board last year. He recently wrote in a letter to the Harvard Business Review that Blockbuster was the worst investment I ever made.

The winning bid must be approved at a hearing in federal bankruptcy court on Thursday.

Dish shares fell 4 cents to $24.27 on Nasdaq early Wednesday afternoon.

The case is in re: Blockbuster Inc, U.S. bankruptcy Court, Southern District of New York, No 10-14997.

(Additional reporting by Sakthi Prasad and Supantha Mukherjee in Bangalore; Editing by Derek Caney and Richard Chang)